National Living Wage: From Classroom to Newsroom

How teaching from a Birkbeck BSc Economics module ended up in the FT

mouse and ftOn 1 April, 2016 The Financial Times reported the results of a survey of UK economists on whether the government’s new national living wage would do Britain “more harm than good” (against) or “more good than harm” (for).

Professor Stephen Wright, of Birkbeck’s Department of Economics, Mathematics and Statistics, was one of four UK economists whose views were quoted at some length in the article. He has since published his comments in full on his personal web page.

“It was good timing” said Professor Wright. “When I got the email from the FT, a few weeks back, it was the day after I’d delivered a lecture on exactly this topic, so I had all the material to hand”.

The lecture Professor Wright had just given was for the module, “Current Economic Problems”, given to 1st year undergraduates on Birkbeck’s new BSc Economics programme, which admitted its first students in 2015/16. Students receive a lecture on a particular economic problem one week, and then, the following week, are required to give a presentation on some aspect of the problem, speaking on one side of a debate.

As well as helping to improve students’ communications skills, the module is also intended to show students that the economics they learn from textbooks and in lectures can be applied to practical problems faced by policymakers. Other topics covered in the module this year include immigration, “Nudge”, inequality and the gender pay gap – but topics will change every year depending on what is in the news.

Prof. Wright concluded that, on balance, the national living wage could prove harmful – but with the caveat “that the harm may well be as much from muddying the water as from the actual economic damage done.”

Predicting the impact

Working under the premise that the Chancellor of the Exchequer, George Osborne, believes the corporate sector (or more precisely, the low wage corporate sector) should share some of the burden of mitigating poverty, Prof. Wright concluded that basic economic analysis suggests it unlikely to work as advertised: that“…ultimately consumers of goods and services produced by the low wage economy will pay.”

He argued that the most optimistic perspective you can put on this outcome is that such consumers are possibly less likely to come from the lower end of the income distribution, thus if there was zero impact on employment in the low wage sector, the policy would be mildly redistributive. However, if unemployment in the low wage/low productivity sector increases, this effect would be offset.

Acknowledging that the evidence for adverse employment effects of minimum wages is “pretty muddy”, Prof. Wright goes on to explain that, on the basis of standard textbook models, the extent of any employment losses in the low wage sectors will depend on the elasticity of demand for their goods and services. Indirectly the evidence seems to be quite strong that in the long term these effects can be quite large (viz, for example, the steady fall in the number of pubs in the UK, as drinking in pubs becomes progressively more expensive relative to competing activities).

“If the existing low wage sector contracts it is not clear where those working in it (who typically have low productivity and skills to match their low wages) will go to work instead. But just as important I believe, is that these policies muddy the water. Wages are a very blunt instrument to tackle poverty.”

Case study: The London Living Wage

To demonstrate this, Prof. Wright cites the Greater London Authority (GLA)’s calculations of the London Living Wage (“A Fairer London: The 2015 Living Wage in London”). When the GLA calculated living wages ‘bottom-up’ by looking at the consumption needs of different household types, they got very different answers for different households. Indeed, the small print of the GLA calculations show that, given the current system of benefits, their calculated living wage for a family of two working parents is actually below the current minimum wage.

Drawing from this, the FT quoted Prof. Wright’s key conclusion, that “…a single Living Wage, built up from consumption needs, is not a logical construct: if it had any basis at all it should be a set of living wages, for different household types (but with the bizarre implication that, in the current benefit regime, having children would result in a reduction in the relevant Living Wage).”

“My personal view is that poverty reduction for those in work can be, should be, and already is carried out by government benefit policies. The tax credit system was one of the great unacknowledged success stories of Gordon Brown, and I’m pretty sure that it has been the primary factor behind our sustained low unemployment rate, and the resilience of employment during the recession. It seems a shame to start to throw this away just as it has really proved its value.”

Birkbeck is known to provide the highest quality teaching, which can be applied to the workplace. For BSc Economics students on this occasion, what Prof. Stephen Wright was teaching them went from their classroom to a highly respected media publication.

All enrolled students in the School of Business, Economics and Informatics at Birkbeck, University of London can subscribe to FT.com for free through the Birkbeck e-Library.

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